The coronavirus pandemic has forced millions of Canadians to work from home in an effort to protect themselves from getting infected with a virus that has killed millions of people globally. The Canada Revenue Agency (CRA) allows people working from home (even before the COVID-19 pandemic) to deduct some expenses from their overall income tax return. However, many CUPE members do not work from home and may not be familiar with working from home tax deductions.
To address this dilemma, the government announced a new tax credit for Canadians working from home due to the coronavirus pandemic. This simplified process is intended to minimize the administrative burden on both employers and employees for the fiscal year 2020. If you have questions regarding the flat rate method or detailed method and other aspects of taxes, consult with the tax experts at PersonalBanker. Here are essential considerations you should know.
1. Home office expenses
Canadians working from home can now claim what’s commonly known as working from home tax deductions on their personal income tax returns cost of supplies (home office expenses) they incurred. For employees to deduct employment-related expenses from their taxable income, they must have worked from home.
Under the new circumstances linked to the COVID-19 pandemic, employers are required to issue the Declaration of Conditions of Employment contract terms (Form T2220s). Simply allowing your workers to work from home might not meet the eligibility requirements. That means employers cannot issue Form T2200s until the Canada Revenue Agency issues and administrative relief or other relevant guidance.
Employers who wish to have their workers working from home must issue such directives in writing. This will be necessary during the calculation of working from home tax deductions. For instance, an email laying out the terms of working from home should specify the required home space and the minimum number of hours they should work – over 50% of the time to handle official duties.
Canadian employees make working from home tax deductions for the employment-related use of home-based workspace, as long as these office expenses were incurred to earn employment income. Extra office expenses that are deductible include the prorated portion of the cost of electricity, cleaning materials, minor repairs, and heating. However, expenses like property taxes, depreciation, and mortgage interest are not deductible from your employment income.
Workers must retain and readily have sufficient support of tax claims they intend to make. If you need help to figure out the specific working from home tax deductions you are eligible for, contact PersonalBanker.
2. Financial support offered to workers working from home
Not all homes across the country have a functional separate home office. When workers transition to work from home, employers may consider offering stipend or allowance to the workers to buy necessary office supplies or pieces of office equipment. In lieu of cash allowances, employers may also want to reimburse workers for the expenses linked to the acquisition of special equipment like an office chair, desk, and computers. So, should these expenses be classified as working from home tax deductions?
The tax treatment of these reimbursements or cash allowances is taxable. According to the CRA’s current rules, regular workers cannot deduct the cost of leasing or buying office equipment. Accordingly, the reimbursements and cash allowances received by workers for this purpose are considered taxable benefits and must be included in the total income in the specific year of receipt. That means they may not be classified as working from home tax deductions.
Employers should not provide cash reimbursements or cash allowances to workers. Instead, they should buy the required house office equipment for the employees. While workers are working from their homes, there shouldn’t be taxable benefits to them because the employer is the main benefactor.
Incidental personal uses may also be considered incidental to the business purpose and not considered a taxable benefit. Suppose an employer is buying the office equipment for employees, and the workers are allowed to keep the equipment after it’s no longer required. In that case, the employer may not be considered the main benefactor, and the total value of the personal use of that special equipment is taxable. So, you may not classify such benefits as working from home tax deductions.
Suppose the benefit (of purchasing office equipment for work from home) is considered taxable to the workers. In that case, the employers should consider whether they will bear the tax expenses for employees or the workers will be responsible. In the event that employers are bearing the tax expense, a tax gross-up may be necessary. Either way, such issues must be communicated early enough to avoid surprises, particularly during the tax filing period.
3. Parking & mileage reimbursements
Even when workers choose to continue working in the employer’s actual home office, they may opt for private transportation over public buses to possible exposure to coronavirus. Should this item be classified as working from home tax deductions? Travel between the employer’s actual home office and the regular workplace is considered a personal travel expense. Accordingly, all reimbursements by employers of mileage and parking costs linked to travel to and from work are usually taxable to the worker.
Suppose the benefit is considered taxable to the workers. Employers must consider whether their businesses will bear the additional cost on that benefit or the workers will be responsible for the additional tax expense. If the employers choose to bear the tax, a tax gross-up is necessary. This issue should be communicated early enough to the workers.
4. Tax benefits reporting & relevant withholding obligations
Suppose the benefits discussed above are subject to tax. In that case, tax withholding and reporting are necessary. If employers choose to bear the tax expense on behalf of the workers, and all the employees are enjoying the net benefit, the total taxes paid would be considered a taxable benefit.
Employers must fund the income tax by simply remitting the tax withholding (plus the ‘tax on tax’) to the Canada Revenue Agency via payroll. Note that the total benefit must be reported on Form T4 and indicated as wages.
In the event that the workers will be the additional tax expense, the employer should withhold income tax from the workers’ regular pay within the period the workers get the underlying benefit. It’s recommended to consider the cash flow implications to the workers.
5. Eligibility for EI (Employment Insurance)
The federal government waived the 1-week waiting period for the employment insurance sickness claim due to the pandemic. Employees with no paid leave benefit but qualify for EI benefits can apply for employment insurance benefits, particularly if they’re asked to self-isolate for 14 days or are in medical quarantine. Since the waiting period has been waived. Workers can get employment insurance benefits for the entire 14-day period.
For workers who fall sick beyond this 14-day period, they can get extra 13 weeks of employment insurance sickness benefits. That means the amount is calculated depending on 55% of the worker’s insurable earnings for the previous year (or since the last time). This amount shouldn’t exceed $573 per week.
Canadian employers may consider offering ‘top-up’ benefits to workers who are unable to work due to the pandemic and are collecting employment insurance benefits. Until the CRA issues further guidelines, supplementary unemployment benefits plans must be registered. Bot supplemental payments and employment insurance are taxable to the workers. This is an important issue to consider and is also linked to working from home tax deductions.
6. Temporary relocations
Suppose a worker is temporarily working away and should relocate to Canada. In that case, the reimbursement of travel-related expenses is considered employment-related and subject to income taxes. Note that reimbursement of travel costs for your family member is taxable.
But if the worker is in a foreign location for vacation or other personal reasons and must relocate to Canada, the reimbursements of travel expenses from his or her employer are considered a taxable benefit that is subject to income tax liability. Consult with the tax experts at PersonalBanker to understand items that should be regarded as working from home tax deductions.
When necessary, employers should reimburse travel costs, including lodging and board, rather than offering cash allowances. Generally, non-accountable allowances are considered taxable benefits.
If the benefit is taxable to the workers, employers must consider whether their businesses will bear the extra tax expense on the benefit or the workers will bear that cost. If the employers will bear the expense, a tax gross-up is required. The treatment of these benefits is considered under the foreign location tax regulations.
7. Implications for cross-border workers
Suppose an employer has workers on assignment or traveling for business activities outside the country, all changes to their assignment, including working from your house, may result in changes to the worker’s contract of employment and employer’s payroll. In such issues, it is important for the employer to prioritize the worker’s safety and health. At the same time, timely and clear communication is paramount. Consult with PersonalBanker to know what should be classified as working from home tax deductions shouldn’t.
One common issue that has arisen involves the calculation of internet access fees, cell phone service expenses, office expenses, and other issues in relation to working from home tax deductions. You can either use the CRA’s calculator or work with PersonalBanker to determine what items can be classified as working from home tax deductions, ensure effective domestic tax planning, and get other relevant questions answered.